The Banker Who Crushed His Diamonds

by Furquan Moharkan

  As this blog was probably being written, around 500 kilometres away, at the RBI office in south Mumbai, officials from Tilden Park were meeting the central bank’s officials. It was about 4 p.m. The Tilden Park officials told the RBI that they were willing to invest $500 million at YES Bank. However, the RBI officials cut them short by saying: ‘Why are you only talking about it? Where is the money? Please put it in the escrow account of the bank.’ An escrow account is where funds are held in trust whilst two or more parties complete a transaction. This means a trusted third party, such as Escrow.com, will secure the funds in a trust account.

  By the next morning Tilden Park had transferred the sum to YES Bank’s escrow account. Yet the RBI had its apprehensions. In its weekly meetings with the YES Bank management, it was clearly mentioned that the bank would need $3 billion as capital and write off Additional tier 1 bonds — perpetual bonds without any expiry date that banks are allowed to issue to meet their long-term capital requirement. The RBI was convinced that it was beyond the capacity of the bank to pull it off.

  Early on the morning of 5 March, the story about the government okaying the bail-out plan led by SBI, which was being deliberated upon, broke. I checked with the RBI. Since the bank was expecting the results by 14 March, I was expecting the plan to be implemented by then. But what the RBI sources told me left me amused: ‘We can’t wait till 14 March. We don’t have that much time.’

  Behold, this was the same regulator who had egged on any kind of bailout in the past seven months, when things were crystal clear. We knew a major action plan was on the cards, but no one knew when it would be implemented.

  During the day, the news of a probable bailout spread like wildfire. The YES Bank stock, which was now determined by ill-informed retail investors, went into a frenzy. The retailers, who by now had lost hope in the bank’s future, considered this news to be a saviour. Within hours, YES Bank shares jumped by 29.3 per cent and ended the day with gains of 25.6 per cent. But the retailers went about buying the stocks thinking ‘acche din aane waale hai (Good days are coming)’. Meanwhile, the bank was unaware of it completely. At least that is what it seemed to be from YES Bank’s afternoon statement on 5 March.

  ‘In the said matter, we would like to clarify that as on date, the bank has not received any such communication from RBI or any other government or regulatory authorities, or from the SBI, and we are unaware of any such decision. Therefore, we are not in a position to comment on such news item,’ the bank, in its 5 March clarification to the exchanges said. At this point, the bank was certain that it would be able to raise the much-needed funds.

  ‘The bank in the usual and ordinary course of its business continues to explore various means of raising capital/funds through issuance of securities to diverse set of investors to meet its business/regulatory requirements, subject to compliance with prescribed procedures and receipt of statutory/regulatory approvals,’ it said.

  It did seem like the bank wasn’t aware of the developments. The RBI, along with the saviour banks, was planning to take unilateral action. ‘We didn’t know it was happening. We came to know around the time you came to know about it as well. We didn’t even know the exact details of the plan,’ an executive from the bank, who was in regular touch with the RBI, told me.

  The markets closed, but the story hadn’t ended. After filing my daily stories, around 8.45 p.m. on 5 March, the government and the RBI finally swung into action. The RBI placed YES Bank under moratorium and restricted withdrawals to Rs 50,000 as the central bank assumed control of the troubled private sector lender. According to a gazette notification by the Ministry of Finance, no person could withdraw an amount in excess of Rs 50,000 from the bank from 5 March to 3 April, irrespective of the number of accounts they held.

  ‘The Central Government hereby also directs that during the period of moratorium, the Yes Bank Limited, Mumbai, Maharashtra (the said banking company), shall not, without the permission in writing of the Reserve Bank of India make, in the aggregate, payment to a depositor of a sum exceeding Rs 50,000 lying to his credit, in any savings, current or any other deposit account, by whatever name called,’ said the notification by the government.

  In a late evening notification, the RBI had said that the entire board of YES Bank had been superseded and Prashant Kumar, ex-DMD and CFO of State Bank of India had been appointed as the administrator under Section 36ACA (2) of the Banking Regulation Act. The Department of Financial Services, under the Ministry of Finance, also issued the directions in exercise of the powers conferred by sub-section (2) of Section 45 of the Banking Regulation Act, 1949 (10 of 1949).

  One of the bank’s executives, who was part of the RBI’s mediation talks, told me in clear terms: ‘All hell has broken loose.’ The shocked management and board were caught off guard. They had no clue that it was happening and that it was happening, so soon. There were no further calls made. The next thing we knew was that Ravneet Gill, who wasn’t nursing any grudges, went back to office twelve hours later, on 6 March, and handed over to Prashant Kumar.

  I tried contacting Ravneet, who, going by the accounts of the people close to him, was very media-savvy. But after that point, he went incommunicado. Calls weren’t going through to him. He wasn’t seeing his WhatsApp messages.

  The plan was for the SBI to bail YES Bank out, with other banks providing a supporting role. But there was discontent in SBI against this deal. There was vehement opposition by the SBI against the RBI forcing down YES Bank down its throat. ‘They (RBI and the government) think that SBI is a bottomless pit. Why should we even bailout some other entity,’ a senior official from SBI told me hours before the RBI dismissed the YES Bank board.

  Personally, it was an emotional moment for me. I had been warning about the inevitable doom for a year now. However, all tricks were used against me: from legal notices to Twitter trolls to personal slander. One such trick was a letter, which was masked as a legal notice and signed by the bank’s marketing head. It said, ‘Either he (talking about me) is completely ignorant or acting at behest of short-seller cartel to promote fear mongering.’

  The RBI cited six critical issues for taking charge of the bank — from deterioration in asset quality, governance issues and false assurances of raising capital to no serious investors in sight and outflow of liquidity by way of deposit withdrawals. All these were happening since October end, but it seems that the RBI was giving the bank too long a rope, and that is what has been vetted through interviews with various directors. Earlier in October, the RBI had waited for shadow bank DHFL, which was closely connected to the YES Bank fiasco, to go bankrupt with about Rs 80,000 crore dues.

  I somewhere felt that I had been vindicated, but I also knew that this story hadn’t ended. The depositors’ money was safe, but the road map was unknown. In my opinion, had the RBI acted on time, there would have been no need of the moratorium as well. The bank needed capital to write off its bad loans and was bleeding on that front. The capital wasn’t coming. The depositors, who were providing the buffer in terms of funds, had fled. Hence to prevent the liquidity position, the RBI was left with no option but to place a moratorium on withdrawals.

  The next morning, on Friday, the country woke up to gloom. India’s fourth largest bank, and a story that was said to be of great entrepreneurship, had failed. The customers were just trying to grasp what had hit them. The YES Bank crisis was reminiscent of a similar emergency in the Mumbai-based PMC Cooperative Bank, which unfolded in September 2019. The RBI had imposed similar curbs on the bank after superseding its board. In the case of PMC Bank, over 70 per cent of the loan exposure was to HDIL — which by now is a bankrupt real estate company. The connections don’t end there, as we will discuss in the next chapter.

  Utter chaos prevailed at branches and ATMs of YES Bank across the country on Friday as depositors rushed in panic to withdraw their money. After the RBI placed curbs on withdrawals and sacked the bank’s board, the customers rushed to ATMs and the bank’s branches.
As the queues bulged through the day, the bank ran short of cash and the ATMs stopped dispensing cash—adding to the customers’ misery.

  I had a personal worry. My brother had his salary account with YES Bank and used to get his salary on 5 March. Thankfully, realizing that something wasn’t okay, he had transferred his money to another bank overnight. But all were not lucky as him. ‘Unfortunately, my salary account is with YES Bank and I’m unable to do online transactions since last evening. The server is down. I am worried that I’m not going to get my money immediately,’ said Annet Pillai, a communication professional whom I spoke to in March.

  The RBI had asked YES Bank to stop dispensing cash from its ATMs and directed it to disburse cash only through its branches, so as to keep a check on withdrawals. After the RBI’s direction, the National Payments Corporation of India (NPCI) took the bank’s ATMs offline and customers weren’t able to withdraw money. The bank’s ATMs are manufactured by NCR Corporation but maintained by various other agencies.

  The customers, who visited the branches, also were left in a lurch due to the number of people there who were in a hurry to withdraw their monies. The bank’s customers were not able to conduct online transactions either. Sensing the panic, Prashant Kumar, the RBI-appointed administrator of YES Bank, said, ‘We assure the depositors that their money is safe and there is absolutely no reason to panic. Look forward to continued support from the depositors.’ Separately, in a mail to the depositors of the bank, Kumar echoed similar words. The bank’s digital platform, which was its cherished asset, came crumbling down. Flipkart-owned payment service PhonePe was among the major services that suffered a major outage and went down.

  Other companies that use YES Bank for online payments include Swiggy, Microsoft’s Kaizala, and travel firms MakeMyTrip and Cleartrip, according to data sourced from NPCI. PhonePe has only one bank as its Payment Services Provider (PSP). Google Pay has four PSPs, both Truecaller and MakeMyTrip have two PSPs each. All the other third-party app providers for unified payments interface (UPI) are dependent on a single acquirer bank to process their UPI payments, according to NPCI data. Paytm Payments Bank also restricted transaction settlements, including UPI, into YES Bank accounts to safeguard their users’ money.

  By 9.15 a.m, as the trading on the exchanges opened, YES Bank stocks were hammered by the investors. In the intra-day trade, the bank’s scrips tanked by 85 per cent to a paltry Rs 5.50 per share.

  Remember, we had discussed the increasing short position in the bank? Well, they again come into the picture here. They started short covering — the buying-in of stocks that have been sold short. Since there is there is no mandated limit on how long a short position may be held, imagine an short seller who would have held short position since a year? They had sold a share for Rs 235 a piece, which they ultimately paid Rs 5.50 for after the bank failed — a profit of about 4000 per cent in a year!

  As a result of short covering, in the latter part of the day, the shares of the bank pared the losses to close with 56.4 per cent loss at Rs 16.20 per scrip. However, the investors of the bank lost Rs 3000 crore in a day. By noon, all eyes were on Rana Kapoor. Everyone wanted to approach him. I WhatsApped him. In his typical calm demeanour, he washed his hands off the fiasco. ‘I have been out of the bank for a very long time. So, I don’t know (why the RBI did this),’ he said.

  As YES Bank plunged into crisis, the government rushed into firefighting mode. The finance minister held a press conference at 4 p.m. She tried assuring the depositors that the government was committed to safeguarding their money and the RBI, which superseded the lender’s board, said all its employees would continue their services with the same salary for at least a year. The RBI said a solution to revive the bank would be put in place within a month.

  ‘The governance issues in YES Bank were of a serious nature. There was wrong asset classification and risky credit-issuing habits. The RBI had been asked to assess the causes and identify the role played by individuals,’ Finance Minister Nirmala Sitharaman told the press, less than twenty-four hours after the central bank imposed withdrawal restrictions of Rs 50,000 per person in the one month. Separately, the RBI came out with a restructuring plan for the embattled bank, according to which India’s largest lender, State Bank of India, which showed its readiness to invest in YES Bank, would buy 49 per cent stake in the bank and not be allowed to reduce its holding below 26 per cent for three years. ‘The employees will continue their services with the same salary and terms as are already applicable for at least a year. The board of directors of the reconstructed bank will, however, have the freedom to discontinue the services of the key managerial personnel,’ the plan said, much to the relief of the bank’s employees.

  It said a new board would be constituted. The SBI would have two nominee directors on the board and the RBI may appoint additional directors. The board members were to remain in office for a period of one year, or till an alternate board was constituted by YES Bank. The plan also said that all offices and branches of YES Bank would continue to function in the same manner and place. The reconstructed YES Bank could also open new offices and branches, or close down existing offices or branches, in accordance with the extant policy of the central bank.

  This was a one-of-its-king bailout in India. It was not the first for sure. For Indian policymakers, a bank going bankrupt is considered a cardinal sin. If a bank becomes insolvent, the depositors are hit hard — many of whom are retail depositors. Retail shareholders lose money, too. This is what worries the government: it would obviously impact their political capital.

  Global Trust Bank (India) had been involved in the stock market scam of 2001, which stockbroker Ketan Parekh ran. It had lent heavily to individuals speculating in the stock market; when the market crashed the bank suffered extensive losses. On examining the books of the bank, the RBI had found out that its net worth had turned negative. The bank tried getting foreign investors on board to re-capitalize itself, but the RBI was reluctant to permit private investors to restructure the bank. After two years, in 2004, the Oriental Bank of Commerce, which right now is facing a fund crunch itself, bailed it out. GTB had lost its identity. In 2010, Bank of Rajasthan was bailed out when it was merged with ICICI Bank. It, too, had lost its identity.

  But in the case of YES Bank, the deal was unique. The bank was bailed out close to insolvency. But it had retained its identity. This was primarily because in the previous two cases, the bailed-out entity was not a big brand. Also, the bailing-out entity was a single bank. Here, there was a gamut of banks that were bailing out YES Bank.

  The finance minister said that the RBI was assessing the causes and identifying the role of individuals in the YES Bank fiasco, while also blaming the mess on previous governments. This was the same finance minister, who, in Bengaluru, a month back wasn’t willing to do anything about this issue. When I had asked her about the government’s role in the presence of all her secretaries, she had put the ball in the RBI’s court. But, by that time, the whistle-blower’s’ letters had been sent to a finance ministry official, and in a 6 March presser claimed those letters to be the grounds for investigating the bank.

  Now, it seemed, the case was closed for Rana Kapoor. But Rana being the person that he was wasn’t going to let go easily. Around 4.30 p.m. on 6 March, he met an industrialist at the latter’s office, trying to negotiate his rescue. The meeting was arranged by the brother of the industrialist to whom Rana had allegedly been generous in granting loans without proper documentation and risk assessment. However, the industrialist turned him down and Rana left his office after a ten-minute meeting. At 5.30 p.m., the industrialist also called it a day and left his office.

  But there was more to come. Late at night, ED officials swooped down on Rana Kapoor’s home and started a search. This continued till 12 a.m. on 7 March. As the ED found the documents about the malpractices under Rana’s tenure at YES Bank, there were selective leaks about those documents.

  Around 12.30 a.m., Rana Kap
oor was brought to the ED office in Mumbai for questioning. The long session of questioning continued for almost fifteen hours, after which Rana Kapoor was arrested. Here was a banker, who, fifteen months back was rubbing shoulders with the who’s who of India. The ED was also supposed to record statements of Rana’s three daughters in connection with the DHFL loan fraud — a company where the brazenness was comparable to Rana Kapoor’s way of functioning.

  But despite the fact that they were being investigated for being at the centre of India’s biggest banking failure, the Kapoor family didn’t give in. Around 5 p.m. on 8 March, Roshini Kapoor was stopped at the Mumbai international airport while boarding a flight to London. A lookout notice had been issued against her, as she was to be questioned in the DHFL loan fraud. Roshini was later questioned by the ED on 11 March — three days after she tried to escape from India. We will discuss the ED’s investigations in the next chapter, but for now let’s shift our focus back on the bank.

  A day after the finance minister’s presser, the SBI chairman also addressed the media. This was on 7 March, a Saturday. At the press conference, he famously confessed that even his nephew had an account at YES Bank. SBI chairman Rajnish Kumar said that their plan would be ready by Monday and submitted to the RBI, as the bank’s legal team was working overnight to execute the plan. The SBI said that it was looking at a minimum initial investment of around Rs 2450 crore. ‘We may come with Rs 2500 crore initially and our investment could go up to Rs 10,000 crore in the next three-year period, which is the minimum lock-in period,’ he said.

  By next Friday, the restructuring plan was ready. The SBI would infuse Rs 7250 crore into the ailing YES Bank to pick up 49 per cent equity as part of the RBI-mandated bailout plan. On 13 March 2020, the Union cabinet approved the plan. Hours after the plan was approved, a gamut of other financial institutions joined the bandwagon to bailout YES Bank: ICICI Bank and HDFC Ltd committed to investing Rs 1000 crore, Kotak Mahindra Bank committed Rs 500 crore and Axis Bank committed Rs 600 crore.